3 3.

Procurement & Contracting Tendering

It is highly desirable when inviting competitive offers from a number of bidders that the tender received should be based as far as possible on equal terms and conditions and presented in a standardized manner. In this way evaluation and comparison between the tenders received can be made more simply and accurately with less risk of misunderstandings, errors and omissions. The Tender is the most important single document submitted by the bidder. It is here that each bidder confirms that he has read and understood the requirements of the tender documents and based on such requirements, it is here that the bidder states his tender sum for undertaking and fulfilling all his obligations under the contract. It is therefore essential for the Employer that all Tenders received are stated in identical terms and thus it is necessary for the Employer, when inviting tenders, to provide bidders with a standard form of tender which each bidder is required to complete and sign. Actually the usual tender document consists of a number of different documents, of which the following forms the essential elements: Bidding Information: Invitation to bid, Instruction to bidders, Bid form including Bill of Quantities Addenda ( Bid amendment) Contractual Information: Bidding Information: This is part of a tender document, where bidders are required to respond (provide their offer, data, information) in accordance with the inquiry of the documents within the bidding period. This section of the document comprises: i) Invitation to Bid: this is an announcement or a call of bidders to participate in the bid. It contains a short brief description of the project and forward information to bidders such that they can eventually reach a decision on whether to purchase the full bid document and participate in the bid. The invitation to bid shall contain, as a minimum: The name and address of the Client, 1 Agreement form Standard or General Conditions of Contract Particular or Special Conditions of Contract Technical Specifications & Methods of Measurement Drawings Appendix to Construction Agreement

 ii)

A brief description of the project ( type, size and location) including desired time for completion, The means and conditions for obtaining the bid documents and the place from which they may be obtained, The place and deadline for the submission of bids, The place and time for opening of bids,

Instruction to Bidders: This is a separate document in the tender to furnish instruction to bidders on the preparation and submission of the bids. Although it may repeat some of the information in the invitation to bid, the instructions are mostly concerned with the following: Instructions about filling out the bid form, iii) Bid due date, Location to deliver the bid, Examination and evaluation of bids Method of awarding the contract Bid security information, Conditions to become non-responsive to the bid

Bid Form: The bid form is the document upon which the bidder submits its offer such as financial, technical and legal requirements of the bid. The form is usually prepared by the designers with blanks left to be filled out by the bidder. This makes the bids more easily comparable. Items may include some or all of the following: Name of Contractor, Unit prices for the bill of quantities, Basic price index Tender sum both in numbers and in words, Technical information such as key staff to be deployed, equipments to be availed, past experiences, etc Legal status of the company : proprietorship, corporation, partnership, Financial status of the company Key subcontractors Time required for the job by the contractor, Signature, title and date.

iv)

Addenda: After the documents are issued but before the bids are due, changes often need to be made. The most common reason is the need to correct simple mistakes in the bidding documents. Contractors dig deeply into the documents and can spot things missed by the drafter or

specification writer or designer. This may generate additional requests that need to be included in the bid documents. Contractual Information: These are documents included in the tender document to furnish bidders with full and detailed information of the project for application after winning the contract. The bidder should utilize such information to provide a fair and reasonable offer to the bidding document. This section of the document comprises: i) Agreement Form: It serves the purpose of presenting a condensation of the contract elements, stating the work to be done and the price to be paid and providing suitable places for signature and seal of the parties. The following provisions are common to most agreement forms: Identification and full address of the signing parties, ii) short description of the project and the work, Date of commencement and signature, Completion time of the project, The contract price, Enumeration of contract documents constituting the entire agreement.

Standard or General Conditions of Contract : The purpose of the general conditions is to establish the legal responsibilities, authority and rights of all parties involved in the project in normal procedure of the work, in case of disputes, hazards etc. Although the owner can devise his own general conditions, most prefer to use a standard version. This version is understood by all parties, includes tested language and can be revised as needed. For example the FIDIC Conditions of Contract, The Standard Conditions of Contract by the Ministry of Works and Urban Development, 1994 etc. Particular or Special Conditions of Contract : Having similar performance with that of the general conditions, however more specific and relevant to a particular project. It is a supplementary and modified section of the general conditions of contract. Special conditions include additional owner requirements such as parking, use of toilet facilities and working in occupied spaces, etc. Technical Specifications & Methods of Measurement : These are written descriptions of the quality of the project. They detail the materials, equipment and workmanship to be incorporated into the project. Drawings: These are intended to describe the size and dimensional requirements of the project. Many professionals are involved in developing drawings. These include the architectural, structural, sanitary, mechanical, electrical, topographic survey, land profile, and detailing. Appendix to Construction Agreement: Comprises tabulated and narrative information of the project such as amount and liquidated damages, interest rates, completion time, amounts of bond and insurances, defects liability period, retention, progress payments, advance payment, etc. Some of 3

iii)

iv)

v)

vi)

this information might be left blank to be filled by the contractor or might be readily provided by the client. 3.1.1 Qualification of Bidders:

Before a contractor is awarded a contract, it should likely be put through a qualification and selection process on order to arrive at the best advantage to the client in both price and efficiency. The following chart depicts the available options in bid qualification procedure.

Bid Qualification Procedure

Competitive Bid

Negotiative Bid Financial Proposal

Short-Listed Bid

Open Bid

Financial Pr. One-Stage Procedure Two-Stage Procedure

Financial Proposal

Pre-Qualification

Post Qualification

Technical Proposal Financial Proposal

Financial Proposal Technical Proposal

Negotiated Bid: this is a bid arrangement where a client invites, negotiates and enters a contract agreement with only a single contractor. The type of bidding process is selected:

In need of specialized service of a contractor,

In case of conflict of interest between the client and contractor. Say, if the client is the major shareholder of the contractor. Competitive Bid: In a competitive bid arrangement equi-potential and competent contractors are invited to provide their best offer to the bid. Contract is awarded to the most responsive bidder based on a bid evaluation process to be carried out consequently. Short-listed Bid: A bid arrangement where the client directly selects two or more contractors who are technically fit to the project based on their past performance record. The bid evaluation process takes place among these contractors considering only their financial offer. Often the one that offer the least will be awarded the contract. Open Bid: Any contractor qualifying the minimum requirement in the invitation to bid and wishing to participate is allowed to compete in the tender. There are two forms of open bid. Namely: the single-staged procedure and two-staged procedure. In the singlestaged bid, contractors will be required to submit only a single document upon which bid evaluation would be conducted and the least and most responsive bidder will be selected for contract award. A two staged procedure requires submittal of two separate documents that comprise technical and financial proposal. The evaluation process to take place in the twostaged process will be either the pre-qualification or post-qualification. Prequalification process: Assessment and evaluation of the technical proposal of contractors is made prior to opening the financial offers. Financial proposal will be opened if only the contractor attains the minimum passing mark fixed by the evaluators. Financial evaluation will take place among contractors who are found technically qualified to undertake the project. Technical proposal usually encompasses Contractors: Eligibility and registration by authorized body, Past and relevant experience to the work, Capability to the work in terms of key staff, equipment, and methodology proposed, Financial position, Safety and Health management improvised so far.

Post qualification Process: Technical evaluation of contractors will be performed after opening of the financial offer. The technical proposal of the least bidder is first evaluated and if it is found satisfactory, the contract will be awarded without assessing the technical proposal of others. If, however, the least bidder is not found responsive to the bid, then the second least bidder will be

evaluated for its until the evaluators requirements of the bid.

technical fitness to the work. The procedure continues determine a contractor that would best fit to the

3.1.2

Statistical Approach of gambling a Tender.

In an open competition, a contractor needs to devise its own strategy of winning a tender among its competitors. The contractor, after establishing its tender sum (covering the direct costs, overhead costs and the mark-up of the head office including allowances for risk and profit) determines and fixes a reasonable discount (rebate) as percentage of the tender sum as a strategy for winning purposes. This strategy often depends upon many factors which the management body of the contractor has to make a thorough analysis of the situations at hand and take up appropriate winning position. Among the factors that one has to consider include: Work at hand in reference to contractors assets deployed to the work, The goal of the financial manager (profit maximization or wealth maximization), Projected risks and uncertainties of the project, Form of the bid: (open, short-listed, prequalification, etc)

Type and location of the project. It is often advisable and helpful to competing contractors to follow statistical approach and take-up a strategic position of biting a tender. The following depicts the step to be followed in gambling a tender. i) Preparation of a database of price quotations offered by competing bidders. One has to collect and record the tender sum of each competitor from the tender opening sessions. At least the winning price and the tender sum of the contractor under consideration have to be recorded and put in a database file for further undertakings. Example: Contract No. Contractors Quotation Least Bidders Quotation (Birr) (Birr) 1 500,000 450,000 2 750,000 750,000 3 1,000,000 800,000 4 625,000 600,000 5 850,000 800,000 6 250,000 250,000 7 400,000 350,000 8 1,200,000 1,000,000 9 900,000 875,000 10 1,100,000 950,000 6

ii) After having sufficient records of the respective bid prices, one could plot the information on a scattered diagram. X-axis: Contractors own tender prices Y-axis: The least bidder and most responsive bidders price For the example in (i), the scattered diagram looks the following:

1,200,000

1,000,000

800,000

600,000

Scattered Diagram

Series1

iii) Draw the most likely curve referred as a regression line. The simplest to draw is a linear regression line that can be represented by: Y = mX + b Where: Y: refers to the most likely winning price, X: refers to contractors tender prices m & b are coefficients of the regression line. m: The slope of the line b: The intercept of the line. n : number of samples.

Winner Price

400,000

200,000

0 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000

Contractors Own Price

m=

n( xy ) ( x )( y ) n

( ( x ) ) ( x )
2

( y )( ( x ) ) ( x )( xy ) b= n( ( x ) ) ( x )
2 2 2

Furthermore, one has to determine the standard deviations, to define the probable region of winning a tender.
VARIANCE = n 1 2 ( s y m2 sx2 ) n 2

Alternatively, Using The Microsoft Excel: m= INDEX (LINEST(Y values, X values), 1) b= INDEX (LINEST(Y values, X values), 2) Sy = STDEVA (Y values) Sx = STDEVA (X values) For the example in (i), m= 0.813, b= 66476.91, Standard dviation = 55509.2 iv) The final step is to decide the probability of winning a tender using the normal distribution. The chance of winning the tender by offering the most likely price is 50%. A contractor can increase or decrease the probability of winning the tender using the Z-normal distribution theory of statistics. Example: For the example in (i), suppose the contractors tender sum amounts to 675,000 Birr. Determine the rebate to be improvised with 95 % probability of winning the tender. The most likely winning price, Y = 0.813(675,000) + 66476.91 = Birr 615,251,91 :- taken as the mean value () with a winning chance of 50%. The Z-values of 95% probability, from the table = 1.645. The relation between Z, and probability in this case is inverse. Higher probability is achieved by reducing the bid price and hence we need to use the negative value of what we read from the table. Z= Yi

Z= -1.645, = 615,251.91 and = 55509.2, Yi = Birr 523,939.28 Rebate (R) = 100% -- (523,939.28/675,000) x100% = 22.38 % (95% probability of wining) = 8.9% (50% probability of winning) 8

3.2

Contracting

It is a universal practice in construction for a contract to be formalized by a written contract document. The basic purpose of a contract document is to define exactly and explicitly the rights and obligations of each party thereto. The complex nature of construction dictates a form of contract that is relatively lengthy, detailed and binding document in order to describe precisely the legal, financial and technical provisions and requirements. Construction contracts are substantially different from the usual commercial variety. The product concerned is not a standard one but a structure that is unique in its nature and whose realization involves considerable time, cost and hazard. The Contract document comprises the full package tender documents including any addenda issued there to with the technical and financial offer of the successful bidder. Here, both parties put their respective signature and seal on the agreement form which was included in the tender as contractual information. Different kinds of contracts provide different advantages to the client and the contractor. Depending on the risk of the project and the degree of difficulty in estimating costs, the client and contractor try to negotiate the type of contract that best serves their interests. i) The Unit-Price Contract: It is based on estimated quantities of certain well defined items of work and costs per unit amount of each of these work items. This type of contract is suitable for a competitive bid. The specification and estimated quantities are compiled by the designer during the conception phase and the unit costs by the contractor for carrying out the stipulated work in accordance with contract documents. Advantages: Promotes open competition involving quantities of work that cannot be accurately forecast at the time of bidding. More transparent and easier for supervision and control. Disadvantages: Requires reasonable time and cost for the preparation of specification and detailed bill of quantities. ii) The Lump-Sum Contract: The lump sum contract is one in which the contractor agrees to carryout a stipulated job of work in exchange for a fixed sum of money. The satisfactory completion of work for the stated price remains the obligation of the contractor, regardless of the difficulties and troubles he may experience in the course of his construction activities. This type of contract is suitable for a competitive bid. Advantages: The owner knows the total cost of his project in advance, Disadvantages: Limited to construction programs that can be accurately and completely described at the time of bidding. 9

iii) Cost-Plus Contract: Generally this type of contract is suitable for negotiated contract between the contractor and the client. This designates actual cost plus additions for profit and risks depending on the mutual agreement to be reached between the parties. There are three varieties of cost-Plus Contract. 1) Cost-Plus Percentage of Cost Contract: This type of contract fixes percentage of the cost of construction for the profits and risks to be due to the contractor. This contract is particularly well fitted to cover work whose scope and characteristics can be only poorly defined at the outset of operations. Advantages: For an emergency nature that time is not available for the advance preparation of contract documents and for the usual bidding routine, The work entailed may be such that no one can ascertain what difficulties will be encountered or even of what order of magnitude the eventual cost may be, Disadvantages: It doesnt urge the contractor to maintain and practice strict economy in the interests of the owners. 2. Cost-Plus Fixed Fee Contract: A popular type of cost-plus contract is one in which the contractors fee is established as a fixed sum of money. This work must be of such a nature that it can fairly be well defined and reasonably good estimate of cost approximated at the time of negotiations. The contractor computes the amount of his fee on the basis of the size of the project, estimated time of construction, nature and complexity of the works, hazards involved, location of the project, equipment and manpower requirements and similar considerations. Advantages: Time saving in the preparation of contract documents and the usual bidding document, Expedition of work is desirable from the view point of freeing labor and equipment for other contracts. Disadvantages: The contractor should work in a diligent manner and failure to do so will cause additional office, overhead expense to be incurred for which he is not reimbursed. 3. Cost-Plus Sliding Scale Fee Contract: A form of cost-plus contract that acts in the nature of a compromise between the percentage of cost fee and a fixed fee. It is one in which the fee is established in accordance with a sliding scale arrangement. Either of the following general schemes may be followed. a) The fee may be determined as a percentage of cost, with the percentage increasing as the cost falls below the target estimated and the percentage decreasing as the cost rises above the target figure. Fee Rate F= R ( 2T- A ) Where, 10

R F

F: Actual Fee Rate R: Base Fee Rate T: Targeted Estimate A: Actual Cost

b)

Tsum base A Project Cost it for costs below the target The setting of a lump fee with2T provision of increasing estimate and decreasing it for costs above the estimate. Under either arrangement, a minimum fee or percentage is stipulated that is subject to no further decrease regardless of the final cost of the work. L.S = B.L.S ( 2T A ) Where, L.S: Lump Sum Fee B.L.S: Base Lump Sum T: Target Estimate A: Actual Cost

iv)

Design-Construction Contract:

This type of contract refers to both the design and the field construction. Such a project is called a turnkey or package deal. Both design and construction can be included in one contract with the owner on a fixed-sum or cost plus basis. This is common practice in industrial construction that requires special skill in the work.

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